It was a quiet week on the data front, with key releases only gaining momentum towards the second half of the week.
US GDP data, released on Thursday, indicated that the US economy grew by 2% in the first quarter of 2023, surpassing previous forecasts. Consumer spending showed strong growth, with a 4.2% increase driven by a surge in spending on durable goods and services. Exports also performed well, growing 7.8%, while imports increased by a slower rate. However, non-residential fixed investment and government spending were lower than expected. The main factors weighing on GDP growth were private inventory investment and residential fixed investment. The US Federal Reserve (Fed) projects that the US economy will grow by 1% for the year. Meanwhile, the number of Americans filing for unemployment benefits decreased by 26,000 to 239,000 in the week ending 24 June, the largest decrease since October 2021. Corporate profits in the United States fell by 5.9% to $2.329 trillion in the first quarter of 2023. This decline, slightly lower than the previous estimate of 6.8%, was the sharpest since the last quarter of 2020. It was mainly attributed to the Fed’s policy tightening. Undistributed profits dropped by 17.5% to $0.678 trillion, and net cash flow with inventory valuation adjustment, which represents funds available for investment, decreased by 0.6% to $3.127 trillion. Additionally, net dividends saw a slight decline of 0.1% to $1.652 trillion.
Economic sentiment in the euro area declined for the second month in a row to 95.3 in June, its lowest level since November 2022 and below market expectations. Factors such as higher interest rates set by the European Central Bank (ECB) and persistent high inflation contributed to the worsening sentiment among manufacturers, constructors, service providers, and retailers. However, there was a slight improvement in consumer morale. In terms of prices, both consumer inflation expectations and selling price expectations among manufacturers decreased. Among the largest economies in the euro area, the economic sentiment indicator deteriorated in Germany, Italy, the Netherlands, and Spain, but improved in France.
Profits earned by China’s industrial firms fell by 18.8% to ¥2,668.89 billion in the first five months of 2023. This decline was due to the stalled economic recovery, weak demand, and margin pressures. It followed a 20.6% drop in the previous period and a 4% decrease in 2022. Both state-owned firms and the private sector experienced shrinking profits. Among the 41 industries surveyed, 24 saw losses, including petroleum, coal, chemical products, and computer and electronic equipment.
EQUITIES MIXED
US stocks fluctuated marginally between red and black on Thursday. The upward revision to first quarter GDP growth and a decrease in initial jobless claims supported the argument for the Fed to continue raising interest rates. The banking sector performed well as major banks passed stress tests, while entertainment company Disney’s stock declined to four-week lows.
On Thursday, the UK’s FTSE 100 declined slightly to 7,483 as investors reacted to a hawkish stance from major central banks. The heads of the Bank of England (BoE), the Fed, and the ECB emphasised the need for further interest rate hikes due to ongoing high inflation numbers. BoE Governor Andrew Bailey suggested that borrowing costs in the UK would remain elevated for longer than expected. In company news, luxury goods firm Burberry’s shares fell 3.5% due to trading ex-dividend, while B&M Value Retail dropped nearly 7% despite announcing sales growth. Conversely, consulting firm Serco’s stocks surged almost 8.5% after raising its full-year profit and revenue forecasts.
European shares made modest gains on Thursday, with Germany’s DAX and the STOXX 600 both rising by around 0.2%. Investors were analysing various economic indicators, including the eurozone’s business survey, which showed a decline in economic sentiment, despite lower inflation expectations. In Germany, the Consumer Price Index (CPI) for June indicated an increase in inflation, while Spain experienced a modest rise in consumer prices. Central bank leaders in the eurozone, UK, and US maintained their hawkish stance, suggesting ongoing policy tightening. In corporate news, clothing retailer H&M reported better-than-expected profits, and car manufacturer Renault raised its full-year financial outlook.
On Thursday, Japan’s Nikkei 225 Index increased by 0.12% to close at 33,234, while the broader TOPIX Index declined by 0.1% to 2,296. Japanese shares had mixed performance as hawkish comments from major central banks impacted investor sentiment. Despite this, the benchmark indexes remained near their highest levels since 1990, supported by a weak yen and optimism surrounding AI-related technologies. Technology stocks generally performed well, with gains from SoftBank Group, Advantest, and Tokyo Electron. However, some heavyweight stocks like Toyota Motor, Fast Retailing, and Sony Group experienced slight losses.
STRONGER DOLLAR DIMS GOLD’S SHINE
On Thursday, West Texas Intermediate Crude futures rose above $70/barrel as investors considered a larger-than-expected decline in US inventories and evaluated the impact of increasing interest rates on global growth and fuel demand. The Energy Information Administration reported a substantial drop of 9.6 million barrels in crude inventories, surpassing market expectations. The positive revision to US first-quarter GDP growth further reinforced expectations of the Fed’s ongoing interest rate hikes to manage inflation. Major central banks reiterated the need for policy tightening, and Saudi Arabia pledged significant output reduction in July, aligning with the broader Organization of the Petroleum Exporting Countries, OPEC+’s agreement to limit supply.
Gold prices dropped below $1,895 /ounce, reaching their lowest level in over three months. This decline was influenced by the rise in government bond prices following the sharp upward revision of US GDP growth. The stronger economic outlook provided the Fed with more leeway to tighten monetary policy, increasing the opportunity cost of holding precious metals.
Copper futures dropped below $3.70/pound, hitting a one-month low due to factors such as a stronger US dollar and concerns about reduced manufacturing demand in light of the current macroeconomic conditions. The lack of specific support from the Chinese government for its struggling manufacturing sector, coupled with the tightening monetary policies of central banks like the Fed, ECB, and BoE, further contributed to the downward pressure on copper prices. Despite these factors, there are concerns among market participants that the supply of copper may not meet the strong long-term demand driven by the transition to renewable resources. Inventories of copper at the London Metals Exchange and the Commodities Exchange remained at low levels, and both Chile and Peru have reported declines in copper output for this year.
Iron ore prices for delivery in Tianjin, with a 63.5% iron ore content, remained near the $115 mark, staying close to a two-month high of $117 seen on 16 June. Market sentiment was influenced by concerns of lower demand, particularly in the Chinese construction sector, while also considering the possibility of stimulus measures from the Chinese government. Recent data highlighted the challenges faced by China in recovering from pandemic-related lockdowns, especially impacting the property sector. The official manufacturing Purchasing Managers Index indicated another contraction in May, along with a decline in imports and lower-than-expected loan growth. As a result, expectations of stimulus measures by Beijing supported demand prospects for iron ore and other ferrous raw materials. Additionally, the People’s Bank of China aimed to alleviate debt struggles among developers by injecting ¥2 billion in liquidity and implementing a 10 basis point reduction in key interest rates.
HAWKISH CENTRAL BANKS WEIGHS ON RISK APPETITE
The dollar index rose to 103.3 on Thursday, reaching levels not seen in almost two weeks. Positive indicators of the US economy, such as higher GDP growth, lower initial jobless claims, and increased consumer confidence, support the case for the Fed to continue raising interest rates. Additionally, results from the stress tests showed major banks are prepared for economic downturns. Traders are now predicting an 87% chance of a 25 basis point rate hike next month, and the likelihood of another increase in September is also rising and is currently standing at nearly 23%.
The euro held steady at $1.09, remaining near the six-week high of $1.10 reached on 22 June, as investors analysed mixed CPI data from major European economies ahead of the eurozone-wide figure expected today. Inflation in Germany picked up to 6.4% in June, while Italy and Spain saw slower price increases. However, concerns persist regarding the ECB’s aggressive policy tightening, which could potentially lead to a recession. The ECB plans to implement two additional rate hikes in July and September, but the ECB President, Christine Lagarde, expressed the need for more evidence of sustained inflation before making further decisions.
The British pound has slipped towards $1.26, retreating from its 14-month high of $1.2848 on 16 June. Investor concerns emerged due to the potential risk of a recession following the BoE’s aggressive policy tightening. Governor Bailey emphasised that the interest rate hikes were driven by the economy’s resilience and persistently high inflation and maintains his hawkish stance. In June, BoE policymakers implemented a larger-than-expected 50 basis rate increase and expressed their commitment to further tightening measures. Market expectations now point to a peak interest rate of 6.1% by February 2024.
The pound started the day trading at 1.2617/$ and 1.1605/€.
Sources: Trading economics and Refinitiv.
Written by Citadel Global Director, Bianca Botes
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